Paradox of choice in a mandatory pension savings system : challenges for Australian retirement income policy

Abstract

As the Australian pension system has become increasingly privatized and less regulated, decisions about the quantum and nature of pension investments have progressively shifted to pension fund members. This choice environment provides members with the ability to control their own pensions, but it also creates challenges for ensuring pension assets are managed in way that will maximize returns and, ultimately, retirement benefits. Government initiatives to address these challenges have principally focussed on disclosure and education and not on the more pervasive behavioural constraints that limit the effectiveness of the existing policy. We advocate policy solutions consistent with libertarian paternalism where the government provides a competitive choice environment, but actively intervenes to set suitable pension savings and investment defaults.